A SUITable Price? Name Yours
Overnight markets saw a continued, post-Bernanke lift in gold bullion and, once again, background conditions helped propel the yellow metal to a $1022 price tag per ounce. The prime mover -no surprise- was the US dollar, which lost additional value on the trade-weighted index and sank to the 76.35 level. Mildly lower prices were seen in crude oil, as the commodity fell to $70.75 amid some concerns that US distillate stocks may show a jump this morning. Black gold had surged some 3% in Tuesday's session, fueled by the same assumptions that were impacting the dollar and gold.
Bullion prices started off on a high note in New York this morning, and were mainly in the $1016-$1020 range as the first hour of trading unfolded. The London Morning Fix came in at $1017 per ounce. Silver moved 14 cents higher, trading at $17.30 per ounce. The noble metals group showed nice gains as well, with platinum rising $14 to $1338.00 and palladium coming to $3 short of $300 after a $5 gain on the day.
The trades we saw in all three assets yesterday and to some extent today, were, and are still, based on better-than-expected U.S. retail sales data (albeit the number was initially dollar-supportive) and (for the most part) on a statement from Federal Reserve chairman Ben Bernanke that the U.S. recession was most likely over. Missing from his declaration of the probable end of the downturn was a specific timetable for the removal of excess liquidity provided by the Fed.
Thus, we got the renewed speculative interest in assets that are currently seen as carrying higher risk. World stocks, for example, hit 11-month highs on the news. Not your 'normal' buy-gold-sell stocks scenario one is accustomed to. Warren Buffett, at least, believes that the economy of the US will not go into a "double-dip" pattern and is buying equities based on that assumption. Inflation-anticipatory dollar-selling has been the pivot point around which the current rallies have orbited. At the end of the day, perhaps Mr. Bernanke's words were not as conducive to the Tuesday surge as were some of the apprehensions voiced by his predecessor, Mr. Greenspan.
The former Fed Chairman worries that US lawmakers might curb the central bank's agenda of removing the stimulus needle from the recovering economy and that 'inflation might swamp the bond markets.' Anticipation, again. This, because the surface reality still has a disinflationary tilt to it. Core consumer prices (ex food and energy) rose but 0.1% in August.
The core CPI is now up only 1.4% in the past year, the smallest year-over-year gain since February 2004. At what point these tiny gains in prices become meaningful enough to trigger Fed action, remains to still be seen. The central bank appears to have avoided the fall into the black hole of deflation - but just. Will it also be able to avert a collision with 4 or 5 percent inflation? We believe it will. Because, just as in the case of the opposite scenario - there is no choice. Let people be impacted by extremes of either type, and trouble ensues.
A short round-up of gold's near and medium-term price prospects reveals the customary mix of caution and optimism.
London-based metals consultants GFMS expressed opinion that gold prices are likely to correct after their recent run, but could rebound as high as $1,100 an ounce in the next six months. "The market has been driven up very much by short term speculation," said GFMS chairman Philip Klapwijk. "We've seen net long positions on the COMEX reach record levels on the 8th of this month and position length has only grown since then. On the other hand, I think the dollar is looking a little bit oversold," he said. "I think we are going to see a fairly significant correction take place in the gold price in the short term."
Analyst Martin Murenbeeld voiced his own opinion at the Denver Gold Forum the other day, and he called for a possible rise to above $1110 in the coming year, should central banks show signs of acquiring gold. He also pointed out however, that gains in equity markets conventionally dampen gold demand and that the era of de-hedging- a major contributor to the 8 year-long rally in the metal- is drawing to a close.
Despite Barrick's exit from the world of hedging, there are but some 600+ tonnes left out there to de-hedge. Our own July price range projections called for a $1050 top end before year's end but only allowed for a possible $100 overshoot in the event of extreme geopolitical or macroeconomic headlines. A variety that has thus far not materialized on any news service we normally track.
And now, for a more 'intrinsic' approach to what that ounce of shiny yellow metal might actually be valued at. Yes, it is all subjective, as seen by recent spec fund plays, but the Wall Street Journal at least, asks:
"Gold bullion just crossed $1,000 an ounce. But what's it really worth?
Bud Conrad, chief economist at Casey Research and a leading gold bug, says it's worth far more. Based on long-term analyses of macroeconomic trends such as the money supply, he says, "a lot of ratios… get you into the $4,000 to $5,000 level without any problem.
Congressman and former presidential candidate Ron Paul—also a major gold bug—likewise sees the price of bullion rising from today's levels. "It's trebled in the last ten years," he says. "There's no reason it can't triple in another ten years, that wouldn't surprise me." Congressman Paul says the government will erode the dollar's purchasing power, so gold will gain value—however, he says this is a political opinion, and not investing advice.
Is it realistic to think gold could really go to $3,000?
A long-standing rule of thumb among gold enthusiasts is that an ounce of gold should equal the cost of one high-quality man's suit. (A fund manager I know in London argues that this goes back to ancient Rome, when an ounce of gold—allegedly—was enough to purchase a top-of-the-line toga.)
That wisdom isn't particularly helpful today. At Saks Fifth Avenue you could pay $795 for a Hugo Boss suit, or $2,050 for Dior. When I last bought a suit on Saville Row in London some years back, it cost me about $1,200, but one could have spent a lot more.
Michael Narwani, a tailor and the owner of Custom Clothiers in Wellesley, Mass., says his bespoke suits vary from around $700 up to many thousands, but "$1,000 would buy you an excellent suit." By that measure, gold would be about the right price now. A silly debate? Maybe. But this is the central issue any investor faces when dealing with gold.
With stocks, you can look at the price-to-earnings ratio and the dividend yield and reach some conclusions about likely returns. With bonds, you can look at the yield to maturity, which includes both the coupons and any capital gains. But gold generates no income. It is, in a sense, a perpetual zero coupon bond. So valuing it isn't easy.
You can, at least, establish a threshold price. A rational person wouldn't buy an ounce of gold for $1,008 today unless he or she was very confident it would be worth at least $1,500 or so in ten years' time, and at least $2,400 in twenty years. (Otherwise, that person could earn the same amount simply by investing in Treasury bonds.) Some months ago I suggested here that gold could easily become the next bubble. Some people thought I was suggesting gold already was a bubble. Hardly: I would have to know what something was worth before I could conclude it was overvalued.
But there is potential—albeit uncertain—for gold to go much higher. Led by the Fed, central banks world-wide have flooded financial systems with vast amounts of money in the year since Lehman Brothers failed. Those moves risk devaluations in the dollar, along with other paper currencies. Gold and other items in limited supply may well benefit.
The most bullish news for gold is that the public hasn't gone crazy for it yet. Demand for gold coins and gold funds is certainly higher than it was a few years ago, but we're a long way from speculative mania. Sales of the SPDR Gold Shares exchange-traded fund (GLD), the world's largest bullion fund, have actually turned negative in recent months. And Financial Research Corp., a firm that tracks mutual fund sales, says the same holds true for funds across the gold sector.
On the other hand, though gold just crossed the big $1,000 barrier, a number of signs should give investors at least pause for thought. Canaccord Adams, the Canadian investment bank, says September is traditionally the strongest month for gold: October, by contrast, has historically been much weaker.
Meanwhile the insiders at the big gold mining companies are sitting on their hands. Research company Form 4 Oracle, which follows stock sales and purchases by company bosses, reports little insider buying at gold companies. By contrast they were heaving net buyers last fall, just before the big rebound. And although gold looks bullish in dollars, that specifically reflects the greenback's weakness—gold remains well below last winter's peaks when priced in pounds, euros, yen, or Swiss francs.
Despite gold's rise, the market is not, yet signaling any great concern about inflation. On the contrary, when you compare the yields on regular 10-year Treasury bonds and the yields on inflation-protected bonds, the market right now thinks inflation is likely to be about 2% a year for the next decade. That's well below the levels seen before the 2008 crisis. In short: Stay tuned.
Gold may boom from here, or it may not. At this juncture dry powder may prove a better investment than yellow metal."
We have not seen dry powder spot prices lately. Thus, we cannot tell you if they are overbought or oversold. However, the dollar-carry trade and its visible manifestations make us jittery.
Kitco Bullion Dealers Montreal
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